Williams makes competing $4.8B bid for Southern Union *update*

Williams Cos. launched a bidding war for Houston-based natural gas pipeline firm Southern Union Co., making a $39 per share cash offer on Thursday that bests the price that Energy Transfer Equity said it would pay just last week.

Williams’ offer is worth about $4.8 billion, based on the 125 million shares of Southern Union outstanding.

Energy Transfer, based in Dallas, made a stock-based offer that Southern Union has agreed to that’s worth about $33 per share, or $4.2 billion.

“This deal is really right down our wheelhouse,” Alan Armstrong, president and CEO of Tulsa, Okla.-based Williams, said in interview.

Williams is spinning off its exploration and production business this year, allowing Armstrong and his team to focus on its sizable natural gas pipeline, processing and storage business that has more that 14,600 miles of pipelines and 11 billion cubic feet per day of transport capacity.

Southern Union has about 20,000 miles of pipelines and other processing assets. It serves more than 500,000 end-users in Missouri and Massachusetts.

As of press time, Southern Union and Energy Transfer didn’t respond to requests for comment. Southern Union shares rose in after-market trading.

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Update:

In a statement Energy Transfer said it believes its agreement “provides superior value to SUG shareholders as compared to the Williams proposal.” Energy Transfer said its offer for SUG isn’t simply a $33 per share offer but “a tax deferred structure that provides SUG shareholders significant potential upside” in that it will pay a 8.25 percent annualized dividend and allow for a conversion to Energy Transfer shares later.

“Tellingly, prior to withdrawing equity research coverage on ETE today, Williams’ own financial advisors, Barclays Capital and Citi, had stated target prices of $53.00 and $52.50 respectively, representing an additional 15+% upside from ETE’s closing unit price of $45.57 on June 23, 2011,” the statement said.

Southern Union said in a statement it received the offer and will review the proposal.

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Key to the success of the competing offer is George Lindemann, the chairman and CEO of Southern Union and its largest shareholder, with 6.2 percent of the outstanding shares.

Gordon Howald, an analyst with East Shore Partners in Hauppauge, N.Y., noted that Lindemann historically builds up businesses in order to sell them, so tax considerations of those sales are often a major factor for him.

Tax consequences

The Energy Transfer offer was touted as having no negative tax consequences to existing Southern Union shareholders, something a large shareholder like Lindemann might be concerned with, Howald noted.

“It seems very unlikely other SUG shareholders would not vote for the Williams’ offer over the lighter offer from Energy Transfer,” Howald said. “At first blush, Lindemann’s interests might not be the same as those of other shareholders.”

‘A fairly firm way’

Armstrong said his company discussed a merger with Southern Union in the past year and expressed its interest “in a fairly firm way, but did not get an affirmative response.”

That’s why Williams officials were surprised to see the announcement about the Energy Transfer deal last week. As far as Armstrong said he knew, Southern Union didn’t seek bids to compete with the Energy Transfer offer.

“The complexity of that deal is pretty immense,” Armstrong said. “Ours is at such a high premium and so simple, it will be hard for their shareholders to ignore that value.”

The Williams Tower

Williams has about 800 employees in Houston and is the named tenant on the Williams Tower in the Galleria area.

Armstrong said the company is committed to its Houston offices and would look forward to taking on the Southern Union staff, which includes about 600 in Houston.

Armstrong said a combination with Southern Union would lead to cost savings of more than $50 million annually and an immediate increase in cash flow.

The proposed deal also would have no effect on the timing of the planned spinoff of the E&P business later this year.

Raising cash

Williams would raise cash for the transaction by selling assets into its master limited partnership — a tax- advantaged business structure used by many pipeline companies for acquiring assets, Armstrong said, as well as converting some debt instruments to cash.

In each case, the buyer would also assume roughly $3.7 billion in existing Southern Union debt.

tom.fowler@chron.com